Borrowing is not a choice but a necessity for many, shows latest Financial Vulnerability Index
As UK households are hit by unprecedented levels of inflation, the latest update to Lowell and the Urban Institute’s Financial Vulnerability Index (FVI), the most up-to-date index on UK household financial health based on anonymized data from over 9.5m Lowell UK customer accounts and other publicly available data, has shown that households increased borrowing despite interest rate rises to meet the inflated cost of food and energy bills.
John Pears, UK CEO at Lowell, said: “The cost of living is increasing across the board and households are having to fork out more money to pay for essentials like food and bills. With the rising cost of living stretching budgets to their limit, people are turning to credit more and more.
“For many now, a single income shock can be enough to push a household into problem debt. People need help to reduce costs.
“The new government needs to take action to ensure households, especially the lowest incomes, get the support they need. With the recent changes to the price cap, bringing energy bills down has to be the priority. This needs to be at the top of the agenda.”
Signe-Mary McKernan, Vice President at the Urban Institute, added: “While the share of adults claiming social benefits and using high-cost loans has declined, families are likely using credit to keep up with the increased cost of living. Financial vulnerability is currently lower, but looking ahead, there are concerning signs that families in the UK may be balancing on the edge of a financial cliff.”
The new figures show:
1, Credit usage increases as households battle inflation – The impact of inflation was felt keenly by households across the country as they resorted to more borrowing to meet the inflated cost of everyday necessities.
- At 52.7%, credit usage in Q2 2022 was the highest it has been since the early months of the pandemic (Q1 2020)
- Consumer defaults are on the rise again, reversing the post-pandemic downward trend, and are up 7% on the start of the Index
2, Interest rate rises have not changed the appetite for credit among the financially vulnerable – Despite interest rate rises, there has been no shift in the appetite for borrowing. This suggests that for these consumers, borrowing is not a choice but a necessity.
- Credit usage increased from 48.7% in Q4 2021 to 52.7% in Q2 2022
3, Demand for labour has helped to bring down unemployment and benefits usage – Financial vulnerability in the UK has declined overall since the last update to the Index, primarily due to the decline in the share of adults claiming social benefits. This is likely due to strong demand for labour, which suggests that the remaining share of adults claiming social benefits consists of the entrenched unemployed.
- The share of adults claiming social benefits fell from 10.3% in Q4 2021 to 8.7% in Q2 2022
4, Payday lending continues to fall – Payday lending continues to fall, suggesting that the doorstep lending industry is in a long-term decline as a result of regulatory interventions in the high-cost loans market.
- The share of adults with high-cost loans dropped from 13.7% (Q3 2021) to 11.1% (Q2 2022)
- Overall downward trend in high-cost loans, with a slight increase between Q4 2021 and Q1 2022